Tax on refinanced loan can be tricky

DEAR MR. MYERS: We purchased our home three years ago and refinanced our mortgage for the first time recently. We know we can write off the monthly mortgage-interest payments on the new loan, but what about the $2,700 in upfront “points” we paid to take the mortgage out?

ANSWER: All of the monthly mortgage-interest payments you paid on the old loan in the first half of this year, as well as monthly interest you pay on the new refinance through the end of 2006, can be deducted in a lump sum on the income-tax return that you’ll file April 15.

Unfortunately, the tax rules for deducting upfront points paid when refinancing aren’t nearly as generous: You will probably have to write the amount off, a little at a time, over the life of the new loan.

Let’s say you refinanced with a $175,000, 30-year loan and paid 1.5 points for the mortgage. A point is equal to one percentage point of the total loan amount, so your points would total $2,625 ($175,000 times .015).

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Because you chose a 30-year loan, you could deduct only one-thirtieth of the $2,625 annually in points — an amount equal to $88 per year — until the new mortgage is eventually paid off. If you sell or refinance again before the 30 years are up, you could write off the remaining balance of the undeducted points in a lump sum in the year that the sale or next refinance takes place.

It’s important to talk to a tax professional for details. Also order a free copy of IRS Publication No. 936, “Home Mortgage Interest Deduction,” by calling the Internal Revenue Service at 1-800-829-3676 or by downloading the document from irs.gov.

DEAR MR. MYERS: How long can a tax lien stay on someone’s credit report?

ANSWER: A tax lien can stay on a consumer’s credit report for as many as 15 years — more than twice the length of a typical bankruptcy.

DEAR MR. MYERS: I live in an apartment building and have a one-year lease, but the property is being sold. Will the new owner be able to raise my rent, or will he have to honor my current rental contract?

ANSWER: When an apartment building is sold, the new owner takes over all of the property’s existing assets and liabilities. The landlord cannot change the terms of any existing leases, so you won’t have to worry about your rent being raised until your current rental agreement expires.

DEAR MR. MYERS: My husband and I are getting a divorce. Instead of selling our home, my husband wants to give me $75,000 (half of the equity we have) and continue living in the property. If I agree to this arrangement, will I owe taxes on the $75,000 he pays me?

Remember, though, that you’ll remain responsible for making payments on the mortgage that you and your husband jointly took out when you first bought the home, even if you cash his $75,000 check, move out and sign a quitclaim deed that turns your half-interest in the property over to him.

To protect yourself, consider making the deal contingent on your husband refinancing the home loan in his name only. Doing so will prevent the bank from coming after you and ruining your credit if your soon-to-be-ex does not — or simply will not — make his future loan payments. You should also consult a good real estate attorney and professional tax expert.

DEAR MR. MYERS: We bought our home from an elderly man three years ago, and the man carried back a second mortgage of $10,000 to help us close the sale. Our payments on the loan have been $150 per month, and the balance is down to about $8,000. The man died two weeks ago. What happens now? Did our debt essentially “die” when he did?

ANSWER: No, your debt didn’t disappear when the man died. You will need to continue making the payments, either to the man’s estate or to the person who inherits the home.

Try to find the attorney or other person who is handling the deceased man’s estate. I don’t want to seem insensitive, but you might be able to save some money if his heir (or heirs) would consider discounting the remaining $8,000 balance if you’re willing to pay the note off in an immediate lump sum: Heirs are often anxious to wrap up a loved one’s estate quickly, even if it means settling for a little less than they might get otherwise.

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